India’s public sector banks have gone from a troubled past to becoming some of the best‑performing stocks this year.
What changed?
Between 2015 and 2018, many state‑run banks were hit by high bad loans (NPAs) that topped 14%. The RBI stepped in, forcing banks to clean up their books.
Fast forward to 2025, and the picture is very different:
- Gross NPAs are now about 2.6%, down from 7.3% in FY22.
- Net NPAs sit around 0.8% for most large PSUs.
- Return on assets is roughly 1.1%.
- Return on equity is steady at 16‑18%.
- Credit costs have fallen to around 0.4%.
These improvements came from years of stronger provisioning, fresh capital, tighter lending standards and closer RBI supervision.
Why PSUs are beating private banks
Public sector banks now deliver returns similar to private banks but at far lower prices.
- They hold about 62% of India’s deposits.
- Credit growth is ~12% versus ~9% for private banks.
- Dividend yields are higher than many private peers.
- Valuations: private banks trade at 2.5‑3.5× book, while most PSUs trade at 0.7‑1.0× book.
Top PSU banks to watch in 2025‑26
1. State Bank of India (SBI)
- Advances: ₹41 lakh crore; Deposits: ₹53 lakh crore
- Gross NPA: ~1.8%
- CASA ratio: ~40%
- RoA: ~1.1% | RoE: ~14.8%
- Valuation: ~0.9× book
- Digital platform YONO serves >60 million users.
2. Bank of Baroda
- Gross NPA fell from 9.4% (FY20) to ~2.9%.
- Provision coverage >90%.
- RoA: ~1.1%.
- Valuation: ~0.9× book.
3. Canara Bank
- Cost‑to‑income: ~45%.
- Credit growth: ~15%.
- Gross NPA: ~2.3%.
- Valuation: ~0.7× book.
4. Bank of Maharashtra
- Lowest gross NPA among PSUs at ~2.1%.
- Credit growth: ~16%.
Valuation edge – why smart money is interested
PSU banks are delivering 14‑16% return on equity while trading at 60‑70% discounts compared with private banks. Global investors have shown they’re willing to pay 1.7‑2.6× book for private‑sector lenders, highlighting the cheapness of PSUs.
How to pick the right PSU bank
Before buying, look for these numbers:
- Gross NPA < 3%
- Net NPA < 1%
- RoA > 1%
- RoE > 14%
- NIM > 2.5%
- Improving CASA ratio
- Price‑to‑book below historical average
Screening tools that focus on banking ratios can help you find banks that meet all these criteria.
Bottom line
The rally in public sector banks isn’t a short‑term hype. It’s backed by cleaner balance sheets, stable earnings and a big valuation gap that still exists. For long‑term investors, these banks offer a rare mix of improving fundamentals and affordable prices.
Remember, this is just my view, not a prediction. Do your own research and consider talking to a qualified advisor before making any investment decisions.